RaboResearch - Economic Research

Country Report Switzerland

Country Report


Flag Switzerland

Thanks to private consumption, the Swiss economy is doing reasonably well. The persistently low interest rates causes house prices to rise. Populist policies, like the introduction of a cap on immigration will deteriorate the medium-term outlook.

Strengths (+) and weaknesses (-)

(+) Competitive and wealthy economy

Switzerland is one of the richest countries in the world. The economy is diversified and competitive, which is underwritten by the first place in the WEF Global Competitiveness Ranking.

(+) Public debt is low and on a downward trajectory

The gross public debt was 48.7%-GDP (net public debt was only 27.7%-GDP) in 2013 according to the IMF (GMFS methodology), which is low in an international comparison. The fiscal rules introduced in 2003, the debt brake, will avoid a fast accumulation of public debt in the future.

(+) Large, positive, net international investment position (NIIP)

Since 1981, Switzerland had a persistently large current account surplus, which was 10.9%-GDP on average over 2003-2013, resulting in a positive NIIP of 150.9%-GDP in 2012.

(-) Large banking sector poses a contingent liability to the government

The Swiss banking system has assets equal to 469%-GDP. The two largest banks account for 49% of total assets. The domestic loan book mainly consists of residential mortgages, which makes the banks prone to a downturn in the real estate market.

Key developments

1. The Swiss economy performs well due to solid consumption growth

In 2013, the GDP volume grew with an estimated 2%, largely driven by an increase in private consumption (figure 1). Growth is likely to pick up further in the coming year, on the back of improved economic conditions in their main trading partners. The eurozone is expected to recover slowly, while growth in the US is accelerating; both boding well for Swiss exports. The improved outlook of the export-oriented industries will likely support business investment going forward. Private consumption is expected to remain strong. The labour market is tight (the unemployment rate averaged 3.2% over 2013, compared to 2.9% over 2012), which led to a solid rise in wages. The higher amount of consumer spending is also due to a steady inflow of highly-educated and well paid immigrants and strong consumer confidence. A cap on immigration (see development 4) can lead to labour shortages, which will have a negative impact on (potential) growth. Also the buoyant housing market (further discussed below) is an important underlying driver of consumption growth.

2. Low interest rates spill over into increased pressures in the housing market

The introduction of the exchange rate floor by the Swiss National Bank (SNB) in 2012 was an appropriate policy response to the safe haven capital inflows. Notice that since autumn 2012 no intervention in the foreign exchange market has been necessary. Since the monetary policy rate was already at its lower bound (0%-0.25%), the currency peg prevented the Swiss economy from increased deflationary pressures, stemming from decreasing prices of imports. After two years of slight deflation, consumer price inflation finally got back into black figures at the end of 2013. The SNB expects inflation to be 0% in 2014 and 0.4% in 2015, so the removal of the exchange rate floor, and an increase in the policy rate is not expected in the foreseeable future.

The persistently low interest rate spills over into the real estate market. Over the period 2008-2013, residential real estate prices rose 19.7% in Switzerland (figure 2), which is far higher than GDP growth or inflation. Moreover, the regional differences are large, with price increases in Zurich and Geneva outpacing the country. During the same period, the mortgage loan books rose by 27%, and the percentage of high (above 80%) loan-to-value (LTV) mortgages expanded as well. The SNB noticed that also the affordability decreased, with more households taking out mortgages that would be too costly once interest rates start to rise sharply. Going forward, the risk of a further rise in house prices and the volume of mortgages is likely, which increases the potential risks stemming from a potential price correction.

Figure 1: Growth is driven by consumption
Figure 1: Growth is driven by consumptionSource: EIU
Figure 2: House prices are on the rise
Figure 2: House prices are on the riseSource: SNB

 3. Banks increased their capital buffers

In response to the rising house prices and increased mortgage lending, the Swiss government introduced higher capital requirements for residential mortgages, effective after 30 June 2014. This is on top of previous anti-cyclical buffer requirements. Moreover, the Swiss banking regulators required Swiss banks to increase their capital buffers (both the capital ratio to risk-weighted assets and the leverage ratio, capital to unweighted total exposure) above the levels set by Basel-III by 2019. Most domestic banks already reached the requirements, while the SNB expects the big banks to reach the requirements by end-2014. Since domestic banks take the major share of the residential mortgage lending, these banks are also more at risk from a real estate price correction or a sharp increase in interest rates.

4. Populist policies pose a risk to the Swiss economy

One of the key risks to the economic outlook of Switzerland is the move towards more populist policies. In May, the Swiss voters can decide on the introduction of a minimum wage of 22 CHF per hour (about 18 euro), which will negatively affect the competitiveness of the Swiss economy and probably lead to a decrease in jobs. A poll conducted for SonntagBlick newspaper by Léger indicates that a narrow majority of the voters is in favour. Another populist policy, is the reintroduction of quotas on all immigration, including from its neighbouring countries. The vote in favour of this policy is prompted by the increasing house prices, which is partly due to demand pressure from immigrants with an above-average spending power. The initiative must be converted into legislation within three years. Given that any cap on immigration from EU member states would mean a breach of a bilateral treaty with the EU, this could possibly lead to a cancellation of other agreements that give the country economic and trade benefits. Since 56% of Switzerland’s exports go to the EU, any introduction of trade barriers would clearly hurt the Swiss economy. Moreover, in the previous decade immigration helped to reduce the adverse effects of an ageing population and a slowing productivity growth. Immigration also helped to diminish the skilled labour shortages. As the country hosts many European headquarters, immigration of highly educated professionals is necessary to remain an attractive base for these multinationals.

Factsheet of Switzerland
Factsheet of SwitzerlandSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Switzerland is a relatively open, well-diversified and competitive economy. It is both a major financial centre and a big producer of chemicals, pharmaceuticals and luxury goods. As a result the country is one of the wealthiest countries in the world. Moreover the country had a current account surplus since 1981, which results in a large positive net international investment position.

The country has strong public institutions that are well-known for their prudent policies. The government had a budget surplus since 2006, which resulted in a downward trajectory for the public debt. Every year a ceiling is calculated for all government spending. When this maximum is exceeded, the government is forced to save more in the years after. The Swiss political system, a mixture between a representational democracy with instruments of direct democracy (referendums), sometimes provide struggles when introducing reforms. It also makes the country more susceptible to populism. The central bank, the Swiss National Bank (SNB), proved successful in their inflation mandate in the past. The introduction of the cap on the exchange rate in 2012 led to a large build-up of the balance sheet of the SNB that might cause longer-term inflation risks. It, however, was very useful in preventing safe haven capital flows coming in the country and in its turn appreciating the currency to excessive levels. Nevertheless, between 2011 and 2013, the country was still in mild deflation due to lower import prices.

Switzerland’s very large banking sector (assets equal to 469%-GDP) poses a contingent liability to the government finances, as shown by the necessary recapitalization of UBS in 2008. After the global financial crisis, the regulation of the financial sector became more stringent. All banks (both the big international banks and the domestic, mostly cantonal, banks raised their capital levels (often more than doubled their capital ratios).

Economic indicators of Switzerland
Economic indicators of SwitzerlandSource: EIU

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